Alibaba is almost at IPO pricing
Irrationality or Justified?
Disclosure : I own Alibaba in my family’s portfolio. Average cost is HKD 170 (as of 16th March 2022).
Alibaba has been painful to hold. It’s a stock that is now trading at a US$ 240b market cap. When Alibaba listed on the NYSE in 2014, it was valued at US$ 231b. The sell off has been incredible.
What makes this sell-off complicated to analyse is the macro and the micro.
On the macro level, Alibaba has (simplifying to the most succinct points) :
Ant Financial IPO being scuttled
A massive $2.8b fine by Chinese regulators
Increased regulation in China (edu-tech, market dominance abuse etc). Lilian Li has a good article here.
Slowing growth in China GDP
US de-listing concerns
Potential culture problems (996, sexual assault case)
On the micro level, Alibaba has :
Declining earnings growth (only grew 10% in latest quarter)
Declining revenue in the CMR segment (Alibaba’s most profitable and largest revenue driver)
Increasing revenue with deceleration (9.5% quarterly comparison, 16% trailing 12 months vs last fiscal year).
Losing market share (oversimplifying for sure)
Growing Cloud, Cainiao, Trendyol, Lazada etc
Alibaba is a mixed bag. Every time I analyse the company when it hits a new low, I come back to the same conclusion - it has issues, but it is so cheap that sandbagged numbers more than make up for it
On top of this, there is upside within the gestating business segments, continuing share buy backs and a management team with a proven track record of creating value.
I have no plans to sell Alibaba since the upside is mainly based on the macro issues sorting themselves out. Specifically, easing of regulatory pressures (China signals that it is done with regulating tech) & COVID lockdowns ending resulting in China resuming GDP growth.
On top of this, the current valuation is low enough to justify owning Alibaba as a deep-value stock. The business is trading at US$240b with roughly US$47b in cash, receivables & cash equivalents. You don’t need to believe in a lot of growth at this point and the bet would be China’s GDP growing once more, with the Chinese consumer growing with it and Alibaba taking a share of that expenditure in the decade to come.
However, my immediate question is “Should I buy more to get my average cost down to HKD 150 / share”. To hit this target price, I would need to buy 400 shares of Alibaba on the HKEX at HKD 70 / share. That’s an additional SGD 5000 into my Alibaba position.
This will take the Alibaba allocation in the portfolio to 29% on today’s cost basis. On a longer term basis, this allocation will be diluted down to about 6% as I build out other positions. The position will be eventually weighted in a way to not drag down overall portfolio performance, but meaningful enough to drive long term returns.
The plan for me will be to deploy another S$5000 into Alibaba, but I will be spreading this out over the next few months instead of deploying it at once.
The reason for this is the current macro that has depressed prices across many companies that I am currently eyeing. I would like to purchase more firms using my family’s monthly investing capital to take advantage of current prices. Facebook, Tesla & Palantir are positions i’d like to continue adding to.
I will also be adding a greater variety of businesses to our holdings.
I recommend all my friends to avoid picking stocks like me. Downturns are vicious and merciless (exhibit Alibaba) and without conviction + discipline, unrealised losses can quickly become actual losses if one loses their nerve. It is emotionally easier to own a broad index.
I hope everyone stays safe in these volatile times!
Disclaimer : This article is not investment advice and merely for entertainment. I only give opinions, not advice and am not a certified financial advisor. I’m just some bloke on the internet possible shooting my mouth off.
Invest with caution and always do your own analysis. This devaluation in Peloton stock should be a cautionary tale for every investor. It highlights the risk of investing in companies. The story & financials can change dramatically in 2 quarters, resulting in potential permanent loss of capital.